ᐅ Multi-family residential building as an investment property in a city with an aging population
Created on: 2 Oct 2016 12:08
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MaxPower90
Hello everyone, my concern is not directly related to building a house, but maybe some of you will find it interesting and want to join the discussion, which I would appreciate. Given the low interest rates and the fact that I have saved some equity, I am planning to buy 3 to 4 smaller condominiums to rent out, or even better, a small multi-family building.
I come from the Ruhr area and want to buy in this region as well. Of course, with a property, just like with a nice vacation, I want good value for money. At first glance, for example in Herne, you can find properties without maintenance backlog yielding around 7% net annual rental return. In my opinion, this high return is linked to the fact that Herne is not an attractive city for any age group. I have reviewed all the population forecasts I could find online, and Herne is aging faster than average and is projected to lose up to 10% of its inhabitants by 2040.
My question to you is: Is investing in a city like this likely to be a losing strategy due to falling property prices and probable vacancies? Or could it also be an opportunity if the micro-location is good (shopping facilities, public transport, parks, etc.) and the building could potentially be converted to be barrier-free in the medium term? Especially considering the attractive rental yield and the fact that retirees, whom I imagine to be “good” tenants, might be the main target group.
I have never bought residential property before and find it really difficult to assess. I look forward to your opinions!
I come from the Ruhr area and want to buy in this region as well. Of course, with a property, just like with a nice vacation, I want good value for money. At first glance, for example in Herne, you can find properties without maintenance backlog yielding around 7% net annual rental return. In my opinion, this high return is linked to the fact that Herne is not an attractive city for any age group. I have reviewed all the population forecasts I could find online, and Herne is aging faster than average and is projected to lose up to 10% of its inhabitants by 2040.
My question to you is: Is investing in a city like this likely to be a losing strategy due to falling property prices and probable vacancies? Or could it also be an opportunity if the micro-location is good (shopping facilities, public transport, parks, etc.) and the building could potentially be converted to be barrier-free in the medium term? Especially considering the attractive rental yield and the fact that retirees, whom I imagine to be “good” tenants, might be the main target group.
I have never bought residential property before and find it really difficult to assess. I look forward to your opinions!
MaxPower9016 Oct 2016 17:11If you show me the investment option mentioned above, I might consider it. Seriously though, could you try to explain why you think my return calculation is incorrect? I am quite confident that it only makes sense this way.
Think carefully! Otherwise, I will drag you to the notary at 8:00 a.m. tomorrow. Tomorrow, in 15 years, will be the most expensive day of your life, and an experience like that will take you 30 years to recover from.
If you really don’t understand this, please do yourself a favor and don’t consider buying a property for the next 10 years.
Best regards,
Dirk Grafe
If you really don’t understand this, please do yourself a favor and don’t consider buying a property for the next 10 years.
Best regards,
Dirk Grafe
MaxPower9016 Oct 2016 23:15Dirk Grafe schrieb:
If you really don’t understand this, please do yourself a favor and don’t consider buying a property for the next 10 years.Dirk, I have been studying this topic for weeks and I don’t see where my calculations could be wrong. I now understand that, over the entire 15 years, I end up with a net return of about zero, even though I obviously own a larger portion of the property over time. I also understand that €8,500 (about $9,000) relative to €290,000 (about $306,000) plus 15*€7,500 (about $7,900) amounts to roughly 2.1% when we talk about returns after paying off the mortgage. But in fact, I am not investing the full amount of approximately €400,000 (about $422,000) from my own money—instead, a large part is covered by rental income.
I’m very grateful for all your input here in this thread alone. But please, set me free now. Or maybe we are just talking past each other? As a thank you, I promise you a bottle of fine Amaretto.
Christian
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Bieber081516 Oct 2016 23:43Just take a look at how Looman calculates the return on faz.de. Create a table with all payments; the Excel function is called XIRR or something like that. (I’m not sure which of you is right, but it’s not that difficult to calculate. Of course, you need to make assumptions.)
MaxPower90 schrieb:
Dirk, I have been thinking about this topic for weeks, and I don’t see where there could be a flaw in my calculation. It is now clear to me that over the entire 15 years I will end up with about zero net return, although a larger portion of the property will of course belong to me the whole time.Think carefully about that last sentence.
I also understand that €8500 related to €290,000 (about $310,000) plus 15*€7500 (about $8700) corresponds to roughly 2.1% if we consider the return after paying off the mortgage. But in fact, I am not investing the whole sum of around €400,000 (about $430,000) from my own money; I am paying a large part from rental income.Many private property owners think that way, but it doesn’t change the fact that it is incorrect. Mathematics is not a social science. Moreover, professionals operate in real estate – if you enter a market with them (which you inevitably do) and want to achieve the same profits, you have to think and act just like they do. Or even better.
What this means should become clear if you simply reduce the purchase price of the property to €250,000 (about $270,000) instead of the asked €290,000 (about $310,000) and then recalculate the same table that you yourself prepared. It doesn’t matter whether you can actually negotiate the price down that far – the point is that you understand what then happens to the numbers. This impacts the entire calculation, and significantly so. You have lower additional costs (property transfer tax / stamp duty), you have a smaller loan amount, therefore less interest expense, and you finish paying off the mortgage sooner with the same repayment rate. Additionally, the (theoretical) allocation for reserves decreases – which does not change the actual costs for repairs – and last but not least, you are more likely to reach the area of a tax-free capital gain sooner in the event of a sale.
Unless, of course, you sell far below market value to me – then I will of course benefit from that.
I am very grateful for all your input from you alone in this thread. But please, now set me free. Or maybe we are just talking past each other? As a thank you, I promise you a bottle of fine amaretto.
ChristianBest regards,
Dirk Grafe